Stocks end lower; Fed minutes highlight inflation

NickGodt

NEW YORK (MarketWatch) -- U.S. stocks closed lower Wednesday as the Dow Jones Industrial Average ended an 8-day winning streak, after minutes from the Federal Reserve's last meeting on interest rates confirmed the central bank's focus on inflation and dashed hopes it would soon cut rates to boost a slowing economy.

"The idea of a rate cut has been somewhat reduced," said Kevin Kruszenski, head of trading at KeyBanc Capital.

The Dow Jones Industrial Average
DJIA, +0.35%
closed down 89.23 points at 12,484.62, as 25 of its 30 components dipped into negative territory.

The blue-chip average had risen without interruption over the past eight sessions -- a winning streak not seen in over four years - which also gave investors a reason to consolidate recent gains.

"People thought that the Fed had moved closer to a neutral bias" (where growth and inflation risks are seen as equal and where the next Fed policy move is as likely to be a rate cut as a rate hike), said Keybanc's Kruszkenski.

However, the Fed's minutes showed that while central bankers "are moving closer to neutral, they're taking their time," he said.

When the Fed left interest rates unchanged three weeks ago, it tweaked the tone of its accompanying statement by removing a key phrase indicating that further rates hikes might be needed.

But in the meeting's notes, central bankers said they made the change to reflect increased risks to growth, even though "further policy firming might prove necessary to foster lower inflation." See full story.

Stocks opened under pressure after the International Monetary Fund cut its outlook for global growth, while a drop in gasoline supplies briefly boosted crude oil prices.

"This market is concerned about higher commodity price on the heels of the IMF cutting global growth forecasts," said Jay Suskind, director of trading at Ryan, Beck & Co. "This brings back concerns about stagflation [a combination of slowing growth and inflation]."

"We're also concerned about the Fed, which is boxed in there between a slowing economy and an inflationary economy, which historically has not brought good things," Suskind said.

Among blue chips, Citigroup
C, -0.59%
fell 1.2%. The bank said it was cutting 17,000 jobs worldwide in a bid to save $4.6 billion a year by 2009. The stock had gained on Tuesday after the New York Times reported that the bank might cut or reassign 26,000 positions.

Alcoa
AA, +0.46%
shares rose 0.5% after it kicked off the first-quarter earnings season after the close on Tuesday with a 9% rise in profits and an upbeat outlook for the year.

"This is a good start to the season, although rising commodity prices easily accounted for the increase in profits, so it was somewhat sector specific," said Marc Pado, market strategist at Cantor Fitzgerald, in a note.

Bed Bath & Beyond
BBBY, +1.72%
Genentech
DNA, +0.00%
and BlackBerry maker Research In Motion
RIMM
were due to report quarterly results after the close of trade on Wednesday.

In the broad market for equities, 1.569 billion shares traded on the New York Stock Exchange while 1.976 billion shares exchanged hands on the Nasdaq stock market. Declining issues outpaced gainers by 11 to 5 on the NYSE and by 19 to 10 on the Nasdaq.

By sector, banks
$BKX
and biotechnology
BTK, -1.42%
were among the biggest decliners, while pharmaceuticals
$DRG
and airlines
XAL, +1.46%
posted modest gains.

Earnings expectations and the Fed

Investors are already bracing for a sharp deceleration in earnings growth. Thomson Financial expects S&P 500 earnings to rise only 3.3% for the first quarter, marking the first time that earnings growth dips below 10% in 14 quarters.

The lowered bar may help companies beat expectations but investors will focus on earnings forecasts for the rest of the year.

"The positive in the market place is that earnings expectations have been tempered so much that earnings surprises could still come to the upside," said Ryan, Beck's Suskind. "But when earnings come out, investors will turn not to what was, but to what will be."

Cantor's Pado believes earnings growth will have to top 5% "to move the market to a sustainable position above [its] previous highs."

The market stumbled in late February and through early March amid concerns that a meltdown in the subprime mortgage market may worsen the downturn of the housing market, hit consumption, and take down the economy.

Yet, Fed officials have again confirmed they remain concerned about inflation remaining above their preferred target range, dashing market hopes that the central bank would soon cut interest rates to stave off a hard landing for the economy.

In the meantime, "as earnings come out, investors will examine the results of financials, housing stocks and anything to do with consumers, for any signs of where we are" in terms of the impact of subprime and a slowing economy, Suskind said.

And confirming the market's expectations, the National Association of Realtors said that U.S. home prices will probably fall this year, for the first time in at least 38 years. In its monthly housing outlook, the real estate industry group said tighter lending standards will cut into home sales even further than had been projected, driving prices lower. See full story.

Other markets

The dollar gained slightly against most rivals, while the British pound was higher on reports of a possible rule change that would allow foreign profits by U.K. multinationals to be repatriated without tax. See Currencies.

Crude oil futures rose 12 cents to close at $62.01 a barrel following the release of bullish weekly energy supply data. See Futures Movers.

Gold futures rose 20 cents to $681.70 an ounce. Among miners, Gold Fields Ltd.
GFI, +1.81%
rose 0.7%, erasing earlier gains after the South African firm said it has not been approached by a bidder, as was suggested by a Bloomberg report. See Metals Stocks.

Corporate news

Chevron
CVX, -2.41%
said it expects results in the quarter to benefit from a $700 million gain on the sale of its interest in manufacturing assets in the Netherlands, partially offset by the effects of lower refinery utilization. In the first two months of the first quarter, Chevron said combined U.S. liquids and natural gas production fell 3% when compared with the fourth quarter, while combined international liquids and natural gas production fell 1%.

Royal Dutch Shell
RDS.A, -1.21%
agreed to pay $353 million to European investors to settle a lawsuit over its restatement of proved oil reserves in 2004.

DaimlerChrysler
DCX
is sending an executive to New York to meet bidders for its Chrysler arm -- but Kirk Kerkorian is not on the invited list, The Wall Street Journal reported. Meanwhile, The Globe and Mail reported that Magna International
MGA, +2.35%
will team up with Onex (OCX) for a Chrysler bid.

The Journal also reported that the Nasdaq Stock Market
NDAQ, -1.77%
is in talks to buy the Philadelphia Stock Exchange. The Philly exchange, known for options trading, is worth around $250 million to $300 million.

Thomas H. Lee Partners and Bain Capital may increase their $27 billion offer for Clear Channel Communications
CCU, +1.22%
according to a report in The New York Post.

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